Commentary

Wall Street serves Zuckerberg an easy pitch

Commentary: Quarterly revenue estimates very soft

By

JohnShinal

SAN FRANCISCO (MarketWatch) — With the opening of the Summer Olympics and Facebook’s first public earnings report both set for late this week, it’s tempting to use a metaphor from the games to preview the Wall Street action.

But to say that Wall Street analysts have set the bar low for Chief Executive Mark Zuckerberg and his team, or have given them a big head start, would be to understate the issue.

Better to borrow a comparison from the world of baseball, where my city’s San Francisco Giants sit atop their division standings.

So let’s say instead that Wall Street has served Zuckerberg & Co. a fastball right down the middle of home plate. If Facebook’s report doesn’t knock the pitch out of the park, bulls on the stock might want to consider heading for the exits.

Reuters

Facebook Inc. CEO Mark Zuckerberg is seen on a screen moments after the company began trading on the Nasdaq.

I don’t predict that will happen, though, because the Wall Street expectations for Facebook’s
FB, +0.22%
top-line growth are as conservative as you’ll see for a social media stock.

The Silicon Valley company is expected to report second-quarter revenue of just under $1.2 billion, a rise of 30% from the $895 million it posted in the same quarter a year ago.

If the company merely hits that mark, it will be reporting a deceleration of growth that is most unusual for a newly-public company. In the first quarter, Facebook reported year-over-year revenue growth of 45%.

In other words, Wall Street analysts are expecting that Facebook’s business slowed by a third during the second quarter. And this was a stock that was sold to the public as a social media growth story.

Looking at the expectations for sequential growth from the previous quarter makes it just as hard to take the Wall Street estimates seriously.

In last year’s second quarter, Facebook’s revenue grew 22% from the prior quarter. This year, expectations are for sequential growth of 10%, or less than half that rate.

As we’ve explained in past columns, stock analysts don’t like to take chances, because being wrong with a bold call can be really bad for their career advancement.

The Facebook estimates show that school of thought prevails among the three dozen or so analysts covering the company.

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Especially among those stock analysts at the investment banks which underwrote the Facebook IPO, putting out a number that the company might miss would be tantamount to career suicide. It’s bad enough for them — and all those retail investors who bought into the story — that the shares have lost about a quarter of their value since the May offering.

That’s not to say Facebook won’t disappoint. As we told you in one of last week’s columns, Google’s quarterly report showed that per-unit rates for online advertising are still coming down fast, as more users access the Web from mobile devices, rather than PCs. Read “Facebook vs. Google? Maybe not”

Adapting to that rise in mobile usage is perhaps Facebook’s biggest challenge, because mobile ad rates are much lower than those for traditional online advertising. Read “Where the fat mobile margins are”

I’m not placing any bets on Facebook this week, and don’t own or short the stock. But if I did, I’d be betting on an earnings beat, rather than on a miss.

How much that might move the stock will also depend on the company’s forecast and how it does on the bottom line, where it’s expected to post net income of 12 cents a share.

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